2007.02.16

Married Filing Jointly or Married Filing Separately?

Q: Tax Playa, we're poor actors in LA. Should we file as married filing jointly or married filing separately?Mike and Julia, Los Angeles CA

A: There are almost no scenarios in which it is more advantageous to file as "married filing separately." Indeed, doing so disqualifies you from most of the breaks tucked into the tax code...

For the ins and outs of filing status, check out a larger post I did on this.

A married couple can only file two ways: as married filing jointly (where all their income and deductions are aggregated together), or married filing separately (where they each account for them on their own).

At first blush, it may seem that the lower incomes reported by doing MFS would advantage the decision toward that. It simply isn't true in most cases.

By electing MFS, taxpayers waive many tax advantages, including:

Your tax rate generally will be higher than it would be on a joint return.

Your exemption amount for figuring the alternative minimum tax will be half that allowed to a joint return filer.

You cannot take the credit for child and dependent care expenses in most cases, and the amount that you can exclude from income under an employer's dependent care assistance program is limited to $2,500 (instead of $5,000 if you filed a joint return).

You cannot take the earned income credit.

You cannot take the exclusion or credit for adoption expenses in most cases.

You cannot take the education credits (the Hope credit and the lifetime learning credit), the deduction for student loan interest, or the tuition and fees deduction.

You cannot exclude any interest income from qualified U.S. savings bonds that you used for higher education expenses.

If you lived with your spouse at any time during the tax year, you cannot claim the credit for the elderly or the disabled, you will have to include in income more (up to 85%) of any Social Security or equivalent railroad retirement benefits you received, and you cannot roll over amounts from a traditional IRA into a Roth IRA.

The following credits and deductions are reduced at income levels that are half of those for a joint return: the child tax credit, the retirement savings contributions credit, itemized deductions, and the deduction for personal exemptions.

Your capital loss deduction limit is $1,500 (instead of $3,000 if you filed a joint return).

If your spouse itemizes deductions, you cannot claim the standard deduction. If you can claim the standard deduction, your basic standard deduction is half the amount allowed on a joint return.

If you lived with your spouse during the year, the IRA deductibility and Roth IRA eligibility limits are only $10,000 in AGI.

There are a few examples, though, of where it would be more advantageous to claim MFS:

If you have high medical expenses and need to claim the catastrophic itemized deduction, the lower AGI means that the 7.5% wall is that much lower;

The same is true for those claiming miscellaneous itemized deductions, which are subject to a 2% AGI wall;

The same is true for those claiming casualty and theft losses, which are subject to a 10% AGI wall.

All told, it's very rare that MFS status is better off. Even if one or more of the above situations apply to you, chances are the downsides far outweigh the upsides.

Comments

Is this conventional wisdom changing in recent years by the increasing applicability of AMT? E.g., assume a husband and wife with no kids and make approx 325k and 150k respectively with approx 55k of deductions. Many credits and deductions unavailable or phased out. Comparing MFJ return on TurboTax with mock MFS returns (using TurboTax's What-If workheet), MFJ appears to have a higher aggregate (after AMT) tax burden than MFS by approximately $900. Runs against conventional wisdom I've read here and elsewhere; does this sound plausible?; have you seen this or heard of others with similar experience?

What if you live in a foreign country, your spouse is a nonresident alien and does not have a SSN, and all your income was earned in that country and is less than the Foreign Earned Income Exclusion? Would it still matter wheather you filed joint or separate returns?

I have a question on MFS with a capital gain exemption on a real estate. Lets say wife owned the house and sold it with 100K profit, and husband owns another property that is to be sold next year. Would MFS filing for 2007 for the couple with wife's capital gain exemption for 2007 disallow a further cap-gain exemption in 2008 in husbands MFS filing? Normally for MFJ the cap-gain exemption can be used once in tow years.

Alternate minimum tax can be reduced if one filer has adjusted gross income less than 75,000 and together income is high enough to trigger alternate mininimum tax since an exemption on only one filer is lost and in right conditions one may then qualify for 2007 rebate.

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